DBRS Confirms SunTrust Banks, Inc.’s Senior Debt at A (low), Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of SunTrust Banks, Inc. (SunTrust or the Company), including the Company’s Issuer & Senior Debt rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, SunTrust Bank (the Bank). The Trend for all long-term ratings and the Short-Term Instruments rating at the Bank have been revised to Positive. The Short-Term Instruments rating at the Company remains Stable. The Intrinsic Assessment (IA) for the Bank is A, while its Support Assessment remains SA3. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

SunTrust’s ratings reflect its strong banking franchise, focused predominately in growing Southeastern states, a well-diversified revenue stream, and solid balance sheet fundamentals. The Company’s balance sheet has strengthened with solid and improving asset quality, a low-cost, deposit centric funding mix, and relatively stable and sound capital levels.

The Positive trend reflects the substantial progress that SunTrust has realized over the last several years improving its core level of profitability and its efficiency ratio, while at the same time maintaining a lower risk profile. The Company has achieved solid loan and deposit growth as well as increased investment banking income and mortgage banking market share while keeping expenses in check. This has led to sizeable efficiency improvements as over the last six years, the adjusted tangible efficiency ratio improved from over 70% to 62% in 2016. Additionally, DBRS believes that the Company will continue to benefit from investments in the franchise, higher interest rates, improving customer sentiment, and solid expense control.

SunTrust’s recent growth trends continued in 1Q17. Net income available to common shareholders increased 5% to $451 million year-over-year driven by a 7% increase in revenues. DBRS notes that SunTrust’s efficiency ratio increased during 1Q17 reflecting seasonality, although the Company believes it is on track to reach its goal of a sub-60% tangible efficiency ratio by 2019.

Asset quality metrics continue to strengthen with declining nonperforming assets and low levels of net charge-offs. Specifically, nonperforming loans declined 19% from March 31, 2016 to March 31, 2017, and represent just 0.55% of total loans. Meanwhile, net charge-offs have averaged just 34 basis points over the last five quarters. At the end of 1Q17, the allowance for loan and lease losses totaled a sound 1.20% of period-end loans held for investment. DBRS expects the maintenance of relatively stable asset quality in 2017 and notes that the Company’s exposure to commercial real estate lending is substantially lower than many regional bank peers.

Liquidity levels remain solid with cash, cash equivalents and investment securities accounting for approximately 19% of assets as of March 31, 2017. Evidencing franchise strength, average client deposits increased 7% in 2016, outpacing loan growth. Overall, core deposits readily fund the loan portfolio.

Capital levels are sound with an estimated fully phased-in Basel III common equity tier 1 ratio of 9.5% at March 31, 2017, down from 9.8% year-over-year, reflecting some balance sheet growth, as well as ongoing capital management activities as the Company executes on its 2016 capital plan through the end of 2Q17.

Headquartered in Atlanta, SunTrust, a diversified financial services corporation, reported $205.6 billion in consolidated assets as of March 31, 2017.

RATING DRIVERS
If the Company can continue to demonstrate progress with profitability metrics, while maintaining its sound balance sheet, the ratings could be upgraded. DBRS does not see any near-term negative ratings pressure at present, but a failure to sustain improved profitability metrics, greater than peer weakening of credit metrics, operational missteps or charges could result in a negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President - Global Credit Policy
Initial Rating Date: 28 November 2005
Last Rating Date: 30 March 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.